Lotto-like windfall for retirees cashing up and moving to villages

Wednesday, 23 May 2018

Troy Churton: 'Most villages are not a traditional financial investment.'

Aucklanders cashing up their properties and moving to retirement villages are pocketing Lotto-sized chunks of equity.

John Collyns, executive director of the Retirement Villages Association, said his organisation estimated that retirees moved out of 4500 houses around the country each year, and into retirement villages.

Just over 12.5 per cent of the population aged over 75 now lives in a retirement village. Another 30,000-odd live in rest homes. People are moving in at a rate of 50 a week.

Collyns said Auckland retirees in particular were able to free up substantial chunks of equity. 'We estimate that you can move into a retirement village for two-thirds to three-quarters of the average freehold house. But in parts of Auckland there's a greater discount. You might sell your house in Epsom for $2 million and buy into a retirement village for $1.2m, releasing $800,000.

READ MORE: Housing strategies of retirees

'All of a sudden that's a huge boost to your income that you wouldn't have had if you had stayed in your own home.'

People who moved to a retirement village in Whangarei, Tauranga or Waikato would free up even more. He pointed to occupation rights for a new 70 sq m home in a Cambridge development selling for $249,000 - compared to Auckland's median house price of more than $850,000.

The issue of where to live in retirement is becoming a more pressing one for many people.

John Collyns: 'All of a sudden that's a huge boost to your income that you wouldn't have had if you had stayed in your own home.'

Rising house prices have made many older people 'asset rich and cash poor' - and they have looked for ways to tap into that capital.

Retirement villages

Financial adviser Liz Koh said there were not enough retirement villages being built to deal with demand. 'The retirement village won't put them on the waiting list until they are 70. It's a real problem. Then they are on the waiting list for two or three years… you're not getting in until you're 73. Retirement villages make their money when people die. They don't want people in there too long, they want high turnover.'

Troy Churton Commission for Financial Capability retirement villages national manager said, on current population predictions, 1800 more units would be needed each year over the next 20 to 25 years.

'That's an indication of projected demand. There is a lot of development happening but there are some indications that there are disparities between where a lot of new units are being built and where the population to fill them is.'

Auckland has 33 per cent of the population aged over 75 and 41 per cent of the retirement village unit development pipeline. Manawatu/Wanganui has 6 per cent of the 75-plus population and 0.5 per cent of new developments.

Collyns said about 36 new units were being built in retirement villages each week. The main constraints on the sector were availability of land and builders. 'The industry is aware of the demand.' Retirement villages had become a mainstream option over recent years, he said.

The biggest difference between a retirement village and any other property is that you usually only buy the rights to occupy. There are usually ongoing fees and when you move out, you only get back about 70 to 75 per cent of the initial amount you paid. You get no share of any increase in the value of the property.

Churton said people should not rush into the decision to move to a retirement village. They needed to understand the cost of entry, the cost of being there and the cost of departure, as well as the terms of transfer if they needed other levels of care. They should also ask how long they might be charged fees after they vacated their units and how long it would be before their capital was returned.

John Collyns said people were already asking Ryman to start work on a village on its new site in Karori.

'Most villages are not a traditional financial investment. You don't have so much in your will; to leave to your loved ones.'

But he said, if someone planned to move to a retirement village, they should do it while they were young enough to enjoy the facilities. Otherwise they were paying - sometimes significant amounts - for things they could not use.

Downsizing

Many older homeowners have opted to downsize, or to move to a cheaper part of the country. Research by ANZ found 20 per cent of people planned to leave Auckland when they retired.

Many want to avoid the high rates and expensive utility bills that come with larger homes. But some retirees are already facing problems finding a suitable smaller property to buy. Nationwide, new houses are now 61 per cent bigger than they were before 1990.

Retirement villages allow people to tap into the equity in their homes - but they have their own hidden costs, too.

Collyns said, traditionally, people might have looked for a unit. But the brick-and-tile options that were once popular were no longer being built. New units are now usually found in apartment complexes, which usually come with ongoing body corporate fees.

'They cost more and don't release as much money and you're still responsible for the maintenance and upkeep.'

Churton said, provided the development was a good fit, apartments could be a good option. 'You get access to capital gains that you wouldn't get in a retirement village.'

If you've still got debt…

Increasing numbers of people are heading towards retirement with a mortgage. A survey by the Commission for Financial Capability found 16 per cent of people over 65 said they still had a mortgage on their homes.

Koh said a home equity release product would be one way to deal with this, if the loan was small.

Homeowners could borrow against the equity in their houses to pay off the loan with a reverse mortgage. Repayments on that loan were then not due until the property sold. The fishhook is that interest accumulates and compounds, so you can end up owing a lot more than you borrowed. House values need to increase over time to stop the equity in the property being eroded.

Providers limit how much they will lend according to age.

David Boyle, group manager of investor education at the Commission for Financial Capability said other options to get rid of debt could include getting in a border or asking for children's help to pay the mortgage. 'If they're going to be getting it anyway, it's not silly.'